Abstract

Given current fast-changing market conditions and difficulty in obtaining
financing for small- and medium-sized enterprises, this paper studies the robust inventory
financing model under partial information, that is, where the demand distribution is partly
known. Two demand information cases are discussed: (1) the mean and variance and
(2) the support of the demand distribution. In this setting, the robust method that
maximizes the worst-case profit and minimizes the firm’s maximum possible regret of not
acting optimally would be used to formulate the optimal sales quantity. We show that
the approach used in this paper is tractable, and we provide an explicit expression for
the robust optimal policy. We then use numerical examples to compare the firm’s losses
under two demand information cases with those occurring under demand certainty. More
importantly, the numerical examples indicate that our robust inventory financing model
can obtain a robust but not conservative solution.